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Market Analysis 19/01/2015
Language English
Switzerland should be able to withstand the SNB decisionSwitzerland’s Finance minister said in an interview to a local newspaper that the economy can cope with the removal of the EUR/CHF minimum exchange rate. The minister also added that if the exchange rate stays above 1.10, companies should be able to adjust as they are better placed than in 2011 when the floor was introduced. But given the downward pressure on euro as the ECB gears up to introduce a QE program, the EUR/CHF rate is unlikely to move higher to that level, in our view.
Greece entered the final week for national elections, with Prime Minister Antonis Samaras New Democracy political party still behind the opposition Syriza Party. Even though recent polls, including polls published this weekend, show a clear victory by Syriza, it seems not enough to secure a majority in the 300-seat parliament. With an extension of Greece’s aid program due to expire at the end of February, the failure to form a government could add to the already increased tensions with negative outcomes for the euro.
Today’s highlights: On Monday, we have a relatively light calendar day. During the European time, EU foreign ministers hold meeting to discuss policy against Russia and terrorist attack in France. If they decide to maintain the current sanctions or impose new ones, this could hurt RUB further.
As for the indicators, Eurozone’s current account is due out.
As for the rest of the week, many important events and indicators are on the schedule: On Thursday, we have the highlight of the week, the ECB monetary policy meeting. With Eurozone in deflation, expectations for the Bank to introduce a large scale QE program have increased dramatically. If the Swiss National Bank abandoned the EUR/CHF floor on fears that it won’t be able to support it, then ECB officials must be preparing something explosive. Expectations are so high for the ECB to take drastic action that even the rumored EUR 500 bn size QE program might disappoint the market, in our view. Investors may conclude that a cap of any size may be a disappointment. A plan that will probably take shape before the Thursday meeting, suggests national central banks in the Eurozone to buy their own country’s bonds, this would limit the contagion effect. The total bond-buying program would be limited to 20% or 25% of a country’s outstanding debt. Bear in mind that Draghi is willing to do “whatever it takes” to protect the Eurozone, so a larger-than-expected QE program could depress EUR even further, in our view.
On Tuesday, we have the German ZEW survey for January. Both indices are forecast to have risen. Even though this could be the third consecutive rise in the indices, it may not be enough to reverse the negative sentiment towards EUR.
On Wednesday, In the UK, we get the minutes from the latest BoE meeting. Once again the focus will be on the number and the names of the dissenters. Kristin Forbes, who is one of the Monetary Policy Committee's new members, is viewed to be on the “hawkish” end of the scale given her views on slack in the labor market. Therefore, we wouldn’t be surprised if she joins the other two MPC members in voting for a rate hike anytime soon. As for the indicators, the UK unemployment rate is expected to have declined to 5.9% in November from 6.0%, suggesting less slack in the labor market. Average weekly earnings are anticipated to accelerate, adding to the positive employment report. In Canada, the Bank of Canada is expected to keep its benchmark interest rate unchanged. Expectations for the CPI rate to decline on Friday along with the falling oil prices, are likely to keep BoC on hold for longer than it would otherwise, leaving CAD vulnerable.
Finally on Friday, as mentioned above, Canada’s CPI for December is expected to decelerate. This could add further selling pressure on CAD.
Currency Titles:
EUR/USD hits support below 1.1500
GBP/USD declines after finding resistance near 1.5275
EUR/JPY reaches the 135.00 zone
Gold breaks above 1270
WTI rebounds from 45.90
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Currencies Text:
EUR/USD continued sliding on Friday and traded below 1.1500 for a while. However, the rate triggered some buy orders near 1.1460 (S1) and rebounded back above 1.1500. The bias remains to the downside and thus I would expect a move below 1.1460 (S1) to see scope for extensions towards the 1.1370 (S2) hurdle, defined by the low of the 7th of November 2003. Our daily oscillators detect accelerating bearish momentum and amplify the case for further declines. The 14-day RSI stays within its oversold territory and is pointing down, while the MACD stands below both its zero and signal lines, pointing south as well. As for the overall trend, on the daily chart, the price structure still suggests a downtrend. The pair is forming lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.1460 (S1), 1.1370 (S2), 1.1225(S3)
• Resistance: 1.1650 (R1), 1.1730 (R2), 1.1860 (R3)
GBP/USD moved lower on Friday after finding resistance near the 1.5275 (R1) hurdle but the decline was halted by the 1.5075 (S1) line, a support defined by Tuesday’s low. The RSI moved below its 50 line, while the MACD fell below its trigger and obtained a negative sign, indicating bearish momentum. Although these short-term studies support further declines, I would prefer to sit on the sidelines for now as far as the near-term picture is concerned. The reason is because our daily oscillators detect a slowdown in the momentum of the longer-term downtrend. The 14-day RSI exited its oversold field, while the MACD has bottomed and could move above its trigger soon. Taking those technical signs into account and given the trend’s proximity to the psychological line of 1.5000 (S3), I would prefer to wait for a clear close below 1.5000 (S3), before trusting again the overall down path.
• Support: 1.5075 (S1), 1.5030 (S2), 1.5000 (S3)
• Resistance: 1.5275 (R1), 1.5420 (R2), 1.5500 (R3)
EUR/JPY fell sharply breaking below the support (turned into resistance) line of 137.00 (R1) to reach the key zone of 135.00 (S1). The short-term bias is to the downside and as a result I would expect a move below the 135.00 (S1) area to target the low of the 16th of October, at 134.15 (S2). On the daily chart, the dip below 137.00 (R1) also signaled a break below the 2nd price objective of the head and shoulders pattern completed back on the 30th of December. This confirms the negative medium-term picture and magnifies the case for further declines in the close future. Our daily momentum studies indicate accelerating negative momentum and support the notion. The 14-day RSI stays within its oversold zone pointing down, while the daily MACD moved deeper into its negative territory.
• Support: 135.00 (S1), 134.15 (S2), 133.00 (S3)
• Resistance: 137.00 (R1), 139.00 (R2), 140.00 (R3)
Gold continued its rally on Friday breaking above the resistance hurdle of 1270 (S1). Although this move increases the possibilities for further rise towards the round figure of 1300 (R1), I would stay careful of a possible pullback before the longs seize control again. My concerns are derived from our momentum signs. The RSI turned down again and could exit its overbought zone any time soon, while the MACD shows signs that it could start topping. On the daily chart, the metal edged higher after completing an inverted head and shoulders formation on the 12th of January, and this holds the picture positive.
• Support: 1270 (S1), 1255 (S2), 1238 (S3)
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3)
WTI moved higher after hitting support at 45.90 (S3). On Monday, during the early European morning, WTI is trading marginally below the resistance hurdle of 48.80 (R1). A move above that line could challenge again the key barrier of 49.65 (R2), marked by the highs of the 8th and 9th of January. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, the 14-day RSI exited its oversold field and is pointing somewhat up, while the MACD, although negative, moved above its trigger line. There is also positive divergence between both the oscillators and the price action. As a result, I would expect the upside corrective phase to continue.
• Support: 47.90 (S1), 46.50 (S2), 45.90 (S3)
• Resistance: 48.80 (R1), 49.65 (R2), 51.25 (R3)
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Market Analysis 20/01/2015
Language English
GDP rescues China stocks, but probably not Chinese inflation Chinese stocks cratered Monday, with the Shanghai Composite index falling 7.7% as the securities regulators tightened up on margin accounts. But stocks bounced back today after the government announced that GDP rose 7.4% for the year, a bit over estimates of 7.3%. Retail sales for December were in line with expectations at 12% yoy and industrial production for the month beat estimates at 7.9% yoy. So all around good figures that have restored some confidence, along with comments by the regulators that they are not trying to suppress the stock market, just “protect investors’ rights and support the healthy growth of margin trading.” It’s remarkable that the authorities were almost able to hit their 7.5% GDP target while continuing reform measures aimed at the shadow banking system, local government finance and the property market. Nonetheless it’s clear that the momentum of growth is slowing, and with producer prices strongly in deflationary territory, the deflationary impulse emanating from China is not likely to abate any time soon. So while Chinese stocks may be recovering, China’s impact on global monetary policy is likely to continue to be negative. We are still likely to see “currency wars” caused by domestic monetary policy spillover into the international arena this year.
Pressure on DKK peg The Swiss National Bank’s (SNB) surprise end to the EUR/CHF floor last week has put pressure on the Danish krone (DKK), which is pegged to the EUR in a ±2.25% band around 7.46038. Denmark yesterday cut its interest rates 15 bps to defend the peg, with the deposit rate falling deeper into negative territory to -0.2% and the lending rate now just barely positive at 0.05%. Denmark had a current account surplus of 7.2% of GDP last year and a budget deficit of 0.75% of GDP, tiny by European standards. With its AAA-bond rating, it’s no wonder the country has an appreciating currency. Could its peg be in danger too? It’s possible, but less likely than Switzerland. First off, the DKK peg has been in place for over 30 years (it was first pegged to the Deutschemark in 1982), vs less than four years for CHF. Secondly, Denmark hasn’t seen the kind of inflows that Switzerland has an accordingly, the Danish central bank’s balance sheet hasn’t ballooned like the SNB’s has. So while I would expect the DKK to come under further upward pressure, I do not expect them to abandon their peg, which the Economy Minister said was “secure.” I admit though that I didn’t expect the SNB to abandon its peg, either.
Dollar generally higher Overall, the dollar was generally higher this morning in Europe, gaining against all the G10 currencies except for a modest decline vs EUR. CHF was the weakest of the G10 currencies as the market continues to struggle to find an equilibrium level for the Swiss currency now. At this morning’s EUR/CHF level of 1.0181 it is around the bottom of what one academic paper* last October said would be the EUR/CHF range derived from options contracts: 1.01-1.18. So perhaps it is now back to the minimum of what the market had previously thought to be “fair value” for the pair. I expect EUR/CHF to rise somewhat further towards the middle of the range, which would be around 1.095. That would make for USD/CHF around 0.93, assuming that EUR/USD stays constant – which I don’t assume. If EUR/USD moved to 1.14, then EUR/CHF at 1.08 would mean USD/CHF at 0.95. In short, it’s going to be a struggle for USD/CHF to regain parity.
(*Where Would the EUR/CHF Exchange Rate Be Without the SNB's Minimum Exchange Rate Policy?
Today’s highlights: During the European day, German PPI for December is expected to slip further into deflation, showing that the deflationary pressures in the Eurozone are increasing. German ZEW survey for January is also to be released. Even though this could be the third consecutive rise in the indices, it may not be enough to reverse the negative sentiment towards EUR. The pressure on the common currency has been intensified after the SNB’s unexpected move last Thursday to remove the EUR/CHF floor fed speculation that the ECB must be preparing something gigantic.
From Canada, we get manufacturing sales for November.
In the US, the only indicator we get is the NAHB housing market index for January, which is expected to show a small improvement.
In New Zealand, the Q4 inflation rate is expected to decline to 0.9% qoq from 1.0% qoq in Q3. Last time, NZD/USD dropped approximately 50 pips after Q3 inflation declined to the lower boundary of the RBNZ’s range target of 1%-3% over the medium term. Even though the decline suggests less pressure for the RBNZ to resume raising rates, at their last meeting the Bank stated that the next move in rates was likely to be up. However, if the CPI rate falls below the lower boundary they may change their stance and return to neutral.
As for the speakers, BoE Deputy Governor Jon Cunliffe and Fed Governor Jerome Powell speak.
Currency Titles:
EUR/USD finds resistance near 1.1650
AUD/USD declines after hitting resistance at 0.8255
GBP/JPY rebounds from 175.80
Gold trades in a consolidative manner
WTI slides after finding resistance at 48.80
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Currencies Text:
EUR/USD rebounded on Monday, but after hitting resistance fractionally below the 1.1650 (R1) hurdle, it retreated somewhat. In my view, the short-term bias remains to the downside and thus I believe that the forthcoming wave is likely to be to the downside, perhaps for another test at the 1.1460 (S1) line. If the bears are strong enough to drive the battle below 1.1460 (S1), I would expect them to pull the trigger for the 1.1370 (S2) hurdle, defined by the low of the 7th of November 2003. Our daily oscillators detect accelerating bearish momentum and amplify the case for further declines. The 14-day RSI stays within its oversold territory and is pointing down, while the daily MACD stands below both its zero and signal lines, pointing south as well. As for the overall trend, on the daily chart, the price structure still suggests a downtrend. The pair is forming lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.1460 (S1), 1.1370 (S2), 1.1225(S3)
• Resistance: 1.1650 (R1), 1.1730 (R2), 1.1860 (R3)
AUD/USD moved lower after hitting the upper bound of a sideways range it’s been trading since the middle of December. Given that and also having in mind our short-term momentum signs, I would expect the downside wave to continue, perhaps for a test near the 0.8085 (S1) line. The RSI dipped below its 50 line and is pointing south, while the MACD, although positive, topped and fell below its signal. There is also negative divergence between both these indicators and the price action. On the daily chart, the rate is trading below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact in my view. Nevertheless, the short-term pause and the lack of downside momentum is also confirmed by our daily oscillators. The 14-day RSI edged higher to hit its 50 line, while the daily MACD stands above its trigger and is in a rising mode.
• Support: 0.8085 (S1), 0.8035 (S2), 0.8000 (S3)
• Resistance: 0.8225 (R1), 0.8375 (R2), 0.8420 (R3)
GBP/JPY rebounded after finding support near 175.80 (S1) to trade fractionally below the 178.40 (R1) line. Although the price structure still suggests a short-term downtrend, our momentum studies detect that this trend is running out of momentum. There is positive divergence between both our oscillators and the price action. Moreover, the RSI poked its nose above its 50 line, while the MACD stands above its trigger, approaching its zero line. On the daily chart, the picture stays cautiously negative, but our daily momentum studies shows signs that further upside correction could be looming. The 14-day RSI exited its oversold territory and is now pointing up, while the daily MACD shows signs of bottoming.
• Support: 175.80 (S1), 174.60 (S2), 173.90 (S3)
• Resistance: 178.40 (R1), 179.50 (R2), 181.00 (R3)
Gold moved in a consolidative manner on Monday, staying above the support hurdle of 1270 (S1). The bias remains to the upside and therefore I still expect a test near the round figure of 1300 (R1). Nevertheless, taking a look at our near-term oscillators, I remain concerned about a possible pullback before the longs seize control again. The RSI lies within its overbought territory near its 70 line, while the MACD has topped and could dip below its signal line any time soon. On the daily chart, the metal edged higher after completing an inverted head and shoulders formation on the 12th of January, and this holds the picture positive.
• Support: 1270 (S1), 1255 (S2), 1238 (S3)
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3)
WTI slid yesterday, after finding solid resistance at the 48.80 (R1) line and printed a lower high. Today, during the early European morning, WTI settled near 47.30 (S1). Given that I don’t see a clear trending structure on the 1-hour chart now, I will hold a neutral stance as far as the short-term picture is concerned. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, the 14-day RSI exited its oversold field, while the daily MACD, although negative, stays above its trigger line and is pointing north. There is also positive divergence between both the oscillators and the price action. These signs give me additional reasons to sit on the sidelines, as further upside correction could be looming.
• Support: 47.30 (S1), 46.50 (S2), 45.90 (S3)
• Resistance: 48.80 (R1), 49.65 (R2), 51.25 (R3)
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Market Analysis 21/01/15
Language English
USD/CAD breaks through 1.20 as sales disappoint, commodity prices fall USD/CAD finally broke through the 1.20 barrier overnight as manufacturing sales disappointed oil and prices of Canada’s commodity exports fell further. Manufacturing sales were down 1.4% mom in November, a sharper decline than -0.6% in October and double what the market had been expecting. Sales declined in 16 of 21 industries, led by a 5.9% drop in motor vehicles and parts. Given that manufacturing accounts for 10.8% of GDP, this decline will dampen GDP growth. In addition, the price of Canada’s major export commodities continue to decline. Not only oil, but also natural gas and lumber prices are falling. Lumber is down 11% from its recent peak in early December, while natural gas was down 9.5% just yesterday and is off some 35% from its November highs. This sets up a dovish background for the Bank of Canada’s meeting today (see below). The market is already pricing in some small (7 bps) chance of easing by the end of the year, which is in contrast to the tightening expected in the US. I believe USD/CAD can move still higher.
The Bank of Japan cut its inflation forecast for the coming fiscal year beginning in April to 1% from around 2%, an admission that they are not going to hit their 2% target that they were supposed to achieve by then. They still insist however that they will hit the target by the following FY. This increases the likelihood of further stimulus at some point down the road. On the other hand, maybe it means they are going to give up on trying to create inflation, at least for the time being. Kozo Yamamoto, a leading expert on monetary policy in the ruling Liberal Democratic Party, said recently that the effect of the BoJ’s monetary easing last October should start boosting the economy by around this summer. "What more can the BOJ do? I think the central bank can hold off on action and take a wait-and-see stance for the time being," Yamamoto said in a recent Reuters interview. The 5yr/5yr inflation swap in Japan is now at 0.75% while the 5-year breakeven inflation rate is 1.68%, showing that the market does not believe the BoJ will hit its target in the next five years. As a result, I think the market is likely to expect further easing by the BoJ and that should keep JPY under pressure.
The big question then is whether the BoJ’s manifest failure to produce inflation so far will convince the Board to follow the Swiss National Bank’s lead and give up its attempt to control the market. That would be a major, major shock to the global financial system. Japan is famous as the place where officials do everything they can to avoid the dreaded “confusion in the marketplace,” so I would not expect them to take such a radical step. But then again, Switzerland isn’t known as a hotbed of experimental monetary policy, either. ‘
NZD fell sharply as inflation dropped Prices fell 0.2% qoq in 4Q, bringing the yoy rate of inflation down to 0.8% from 1.0% previously. However I still feel more optimistic about NZD than about the other commodity currencies. Yesterday’s milk auction came with a higher price for the second auction in a row. This is in sharp contrast to the performance of industrial commodities recently. NZD/USD may be headed lower, but so too is AUD/NZD, in my view.
Today’s highlights: Today we get the minutes from the latest BoE meeting. The focus will be on the number and the names of the dissenters, especially following the fall in December’s CPI rate below 1% and the comments by the BoE Gov. Carney that lower oil prices are positive for the UK. . Kristin Forbes, who is one of the Monetary Policy Committee's new members, is viewed to be on the “hawkish” end of the scale given her views on the existing slack in the labor market. Therefore, we wouldn’t be surprised if she joins the other two MPC members in voting for a rate hike anytime soon. On top of that, the UK unemployment rate is expected to have declined to 5.9% in November from 6.0%, while average weekly earnings are anticipated to accelerate, suggesting less slack in the labor market. Overall this could be GBP-supportive and the better fundamentals compared to Eurozone could push EUR/GBP further down.
In the US, we get housing starts and building permits, both for December. Both figures are expected to rise keeping the overall trend consistent with an improving housing market. This could signal that the housing market supports what appears to be growing strength in the broader economy and keep the USD supported.
In Canada, the Bank of Canada is expected to keep its benchmark interest rate unchanged. The recent collapse in oil prices is likely to put pressure on the Bank to revise down its 2015 GDP growth and inflation forecasts, as Canada’s Western Select oil was trading around USD 80/bbl when the BoC last did its projections and it currently trades around USD 33/bbl. The extent of the revision will depend on what the Bank assumes for oil prices. This is likely to keep the BoC on hold for longer than they would otherwise. There may even be some discussion of a rate cut. This, along with expectations that the inflation rate for December will slow further when it’s announced on Friday, are likely to leave CAD vulnerable, in our view.
The World Economic Forum will begin in Davos.
Currency Titles:
EUR/USD somewhat lower
NZD/USD collapses on New Zealand’s CPI data
GBP/USD firms up ahead of BoE minutes and UK employment report
Gold ready to challenge 1300
WTI testing the support of 45.90
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EUR/USD traded somewhat lower on Tuesday, staying between the resistance line of 1.1650 (R1) and the support of 1.1540 (S1). In my view, the short-term picture remains negative, but given the positive divergence between the RSI and the price action, I would prefer to wait for more actionable signs that the bears are back in control. I believe that a decisive move below the 1.1540 (S1) barrier is likely to aim for the 1.1460 (S2) hurdle, marked by Friday’s low. As for the overall trend, on the daily chart, the price structure still suggests a downtrend. The pair is forming lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.1540 (S1), 1.1460 (S2), 1.1370 (S3).
• Resistance: 1.1650 (R1), 1.1730 (R2), 1.1860 (R3).
NZD/USD collapsed after New Zealand’s CPI slowed by more than anticipated in Q4. The rate dipped below the support (turned into resistance) barrier of 0.7700 (R1) to reach the 0.7625 line (S1), the lower boundary of the trading range it’s been oscillating in since the beginnings of December. Given the trendless market action and bearing in mind the reaction of the pair near 0.7625 (S1), I would expect the forthcoming wave to be to the upside, perhaps to challenge the 0.7700 (R1) line as a resistance this time. On the daily chart, our daily momentum studies gyrate around their neutral lines, confirming the near-term trendless mode of this pair.
• Support: 0.7625 (S1), 0.7500 (S2), 0.7500 (S3).
• Resistance: 0.7700 (R1), 0.7745 (R2), 0.7805 (R3).
GBP/USD raced higher on Tuesday after finding support near the 1.5075 (S1) barrier. Today, the UK unemployment report for November is forecast to have declined, while average weekly earnings are estimated to have accelerated. We also get the BoE meeting minutes, where there is a possibility that Kristin Forbes, a new member, joined the other two dissenters. Therefore, having in mind these releases, I would expect the rate to move higher today. A break above the 1.5200 (R1) resistance is likely aim for the 1.5275 line. Even though I see a bullish forthcoming wave, the short-term outlook stays neutral in my view. The rate has been in a trendless mode since the 8th of January. As for the broader trend, I maintain the stance that as long as Cable is trading below the 80-day exponential moving average, the overall trend stays negative. But given the positive divergence between the daily oscillators and the price action, I would prefer to wait for a clear close below 1.5000 (S3), before trusting again the overall down path.
• Support: 1.5075 (S1), 1.5030 (S2), 1.5000 (S3).
• Resistance: 1.5200 (R1), 1.5275 (R2), 1.5315 (R3).
Gold raced higher on Tuesday and today during the early European morning, it appears ready to challenge the round figure of 1300 (R1). A clear and decisive break above that key area is likely to extend the bullish wave of the precious metal and perhaps challenge our next obstacle at 1320 (R2), marked by the high of the 14th of August. The RSI stuck within its overbought territory, while the MACD, already at extreme positive levels, rebounded from near its trigger line. These momentum signs confirm the accelerating upside momentum of the metal. On the daily chart, gold shot up after completing an inverted head and shoulders formation on the 12th of January. The price objective of the formation stands around 1340 (R3).
• Support: 1270 (S1), 1255 (S2), 1238 (S3).
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3).
WTI continued its slide yesterday and today it is testing the support barrier of 45.90 (S1), defined by the low Friday. In my opinion, the intraday bias is back to the downside, and as a result, I would expect a move below 45.90 (S1) to target the psychological barrier of 45.00 (S2), also marked by the low of the 14th of January. Our momentum studies indicate strong downside momentum. The RSI declined and now appears ready to enter its oversold territory, while the MACD stands below both its trigger and signal lines, pointing south. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, since there is still positive divergence between the daily oscillators and the price action, I would prefer to wait for the momentum indicators to confirm the price action before getting again confident about the overall down path.
• Support: 45.90 (S1), 45.00 (S2), 44.15 (S3).
• Resistance: 47.80 (R1), 48.80 (R2), 49.65(R3).
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Market Analysis 22/01/15
Language English
Retreat of the hawks Falling commodity prices and the risk of deflation are causing central banks to change their monetary stance. Yesterday we saw three central banks – the Bank of England, the Bank of Canada and perhaps the ECB – dial down their monetary stance and move to a looser policy. These same factors are affecting central banks all over the world, so we can expect (or at least speculate about) similar moves from other central banks in coming weeks. And as these looser policies, taken for domestic reasons, have external spillovers, we can look forward to a resumption of the “currency wars” that were so much a topic in the FX market before the Fed started talking about “tapering” off its QE bond purchases in May 2013.
The day started with the Bank of England’s retreat. Previously, two of the nine members of the Monetary Policy Committee had been voting to raise rates. Yesterday’s minutes showed that the vote is now unanimous to keep rates steady, despite a further fall in unemployment and rise in average wages. Falling oil prices have now made the risk of deflation greater than the risk of inflation.
Next was the ECB as Bloomberg floated a story to the effect that the ECB would discuss a program of buying EUR 50bn in bonds every month until the end of 2016, which would make it an EUR 1.1tn QE program, more than double the EUR 500bn that the market is expecting. The news was offset shortly thereafter by a similar Wall Street Journal story that also mentioned EUR 50bn a month, but only for one year. This reminded people that these are only proposals and indeed anything may be discussed today, but only one will be agreed upon. In fact the amount of the monthly purchases is the crucial issue, not the duration, because the market will discount a lengthening of the program if it proves to be unsuccessful. It’s much easier for them to vote for a one-year program and then vote to extend it if necessary than it is to vote for a two-year program from the outset.
Finally, the Bank of Canada surprised the market with a 25 bps cut in rates, the first change since it hiked rates to 1% in Sep. 2010. Gov. Poloz’s statement accompanying the change repeatedly mentioned falling oil prices (the word “oil” appears 14 times in the 867-word statement). He also noted that “The Bank has room to maneuver should its forecast prove to be either too pessimistic or too optimistic,” meaning that they could lower rates again should their forecast of a return to USD 60/bbl prove wrong. I think their oil forecast is likely to be wrong and that they will have to cut further, which is why I remain bearish on CAD.
Who might be next? The market immediately started speculating on who might be next to cut rates and turned its attention to the other commodity currencies. AUD and NZD sank along with CAD, and the technicals look pretty bad for them both: AUD (see below) and NZD, which just broke out on the downside of the sideways channel it’s been trading in since December. NOK strengthened considerably however, perhaps because they seem to be the one country in the world not facing deflation, or maybe because of the rebound in oil prices (Brent +1%). On the other hand, CHF was the strongest G10 currency – I guess the idea there is that they’ve given up the fight against deflation and no further easing is likely. A country in deflation should see its nominal currency rate appreciate against countries not in deflation, so that move may be modestly justified, although it remains to be seen just how much deflation they face.
Today’s highlights: Of course we are all waiting for today’s ECB meeting. As mentioned above, the size of the bond purchase will be more important than the duration, because they can always extend their program, as the Fed did (of course they can always increase it too, as the Bank of Japan did). Anything less than EUR 50bn a month for one year – EUR 600bn – will probably now be a disappointment and cause EUR to strengthen. The market will also be looking to see whether it involves mutualisation of risk – that is, whether the ECB itself will buy all countries’ bonds -- or whether each national central bank will be responsible for buying its own country’s bonds in an effort to avoid mutualisation of risk. Mutualisation of risk will be a much bigger show of solidarity within the Eurozone and hence a stronger statement, but personally I think they will probably go for non-mutualisation in order to get the Northern countries on board. It’s widely expected that the amount of each country’s bonds to be purchased will be follow that country’s contribution to the ECB’s capital, its so-called “capital key.” They will have to decide what credit ratings they can buy and whether to buy Greek bonds (I expect them to be excluded). Other points to watch will be whether they include EU agency bonds and corporate bonds. Finally, it would add to the psychological impact if the vote is unanimous, while a majority vote (more likely, in my view) would send a weaker signal of commitment.
In Sweden, the unemployment rate for December is expected to remain unchanged from the previous month.
In the US, we get the initial jobless claims for the week ended Jan.17 and the FHFA house price index for November.
Currency Titles:
EUR/USD hits the near-term trend line
USD/JPY rebounds from 117.15
AUD/USD ready to challenge the 0.8035 hurdle
Gold takes the 1300 area
WTI in a quiet mode
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EUR/USD edged higher yesterday, but after hitting the black near-term downtrend line, it retreated to settle between the resistance line of 1.1650 (R1) and the support of 1.1540 (S1). In my view, the short-term technical picture stays negative, but much of today’s directional movement will depend on the ECB meeting and its decision on QE, which will determine the short-term bias of this pair. In the bigger picture, the price structure still suggests a longer-term downtrend. The pair is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. I would expect a move below 1.1460 (S2) in the close future, to pull the trigger for the 1.1370 (S3) area, defined by the low of the 7th of November 2003.
• Support: 1.1540 (S1), 1.1460 (S2), 1.1370 (S3).
• Resistance: 1.1650 (R1), 1.1730 (R2), 1.1860 (R3).
USD/JPY slid after hitting resistance near 118.85 (R1), but triggered some buy orders around 117.15 (S1) and regained about half of its losses. Yesterday’s move printed a higher low on the 4-hour chart and shifted the short-term bias cautiously to the upside. A clear move above 118.85 (R1) would confirm a forthcoming higher high and perhaps open the way for the next resistance of 119.95 (R2). On the daily chart, the rate appears to be forming a possible triangle formation, indicating a medium-term pause in the major uptrend.
• Support: 117.15 (S1), 115.15 (S2), 113.80 (S3).
• Resistance: 118.85 (R1), 119.95 (R2), 120.80 (R3).
AUD/USD tumbled on Wednesday, breaching the support (turned into resistance) line 0.8075 (R1). I would now expect the rate to challenge the lower bound of the sideways range it’s been trading in since December and subsequently, the psychological figure of 0.8000 (S2). Yesterday’s negative momentum towards AUD/USD is also visible on our momentum indicators. The RSI fell below its 50 line, while the MACD, already below its signal, obtained a negative sign and is now pointing south. As far as the bigger picture is concerned, a break below the 0.8000 (S2) psychological hurdle is the move that could trigger the continuation of the longer-term downtrend. Such a break is likely to see scope for extensions 0.7870 (S3).
• Support: 0.8035 (S1), 0.8000 (S2), 0.7870 (S3).
• Resistance: 0.8075 (R1), 0.8155 (R2), 0.8255 (R3).
Gold continued racing higher on Wednesday to eventually take the 1300 (R1) psychological territory. A clear and decisive break above that key area is likely to extend the bullish wave of the precious metal and perhaps challenge our next obstacle at 1320 (R2), marked by the high of the 14th of August. Nevertheless, even though I expect the metal to trade higher in the near future, I would be careful of a possible pullback before the bulls seize control again. The RSI just touched its toe below its 70 line, while the MACD has topped and fallen below its zero line. On the daily chart, gold shot up after completing an inverted head and shoulders formation on the 12th of January. The price objective of the formation stands around 1340 (R3).
• Support: 1270 (S1), 1255 (S2), 1238 (S3).
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3).
WTI moved in a consolidative mode yesterday, indicating indecision between the participants of the oil market to choose a direction. As a result, with no clear trending conditions in the short-term, I would switch my stance to neutral until I get clearer directional signals. The quiet mode is also reflected on our oscillators. The RSI lies on its 50 line and is pointing sideways, while the MACD stands close to its zero line, staying flat as well. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, since there is still positive divergence between the daily oscillators and the price action, I would prefer to wait for the momentum indicators to confirm the price action before getting confident again about the overall down path.
• Support: 47.10 (S1), 46.50 (S2), 45.60 (S3).
• Resistance: 48.20 (R1), 49.20 (R2), 50.00 (R3) .
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Market Analysis 23/01/15
Language English
Draghi pulls out a European bazooka ECB President Draghi Thursday announced a larger-than-expected quantitative easing (QE) program, sending the euro down sharply and pushing Eurozone bond yields to record lows. I expect the program to continue to exert downward pressure on the euro, particularly if SYRIZA wins Sunday’s election in Greece and US rate expectations continue to rise, as seem likely.
The ECB’s move was surprisingly large in both its size (EUR 60bn a month, rather than EUR 50bn as was floated beforehand) and its duration (extending at least until Sep. 2016 or longer if inflation hadn’t returned to target by then). The program is to start in March, so the initial amount is EUR 1.14tn. On an annual basis it’s 7.5% of GDP, which is larger than the Fed’s 5.7% of GDP purchases, hence quite impressive. Moreover the open-ended commitment – to “do all that’s necessary” to get inflation back up, so to speak – was also more than the market had been expecting.
The effect of the announcement was muted somewhat because of the “non-mutualisation” of risk -- the government bond purchases will be carried out by the national central banks, not the ECB. This is just a technicality for public relations purposes however, because unless they put capital controls into place, the risk is still spread throughout the Eurozone.
The ECB will allocate funds to each market according to that country’s contribution to the ECB’s capital, as we mentioned yesterday. That means the larger countries will see more bond buying. However, the ECB limited itself to buying 25% of any one issue and 33% of the total debt of any one country. (The latter limit will prevent it from buying any Greek bonds.) This means that as it reaches its limit in one country, it will have to go further into others to find bonds that it can buy regardless of those countries’ contributions to its capital. This is quite bullish for the peripheral bond markets, which otherwise might not see that much buying. Moreover, the ECB lowered the rate on the targeted long-term refinancing operations (TLTROs) to 5 bps, which means peripheral countries’ banks can borrow money for four years at 5 bps and use it to buy their governments’ bonds – nice work if you can get it!
We were anxious to find out what the vote was, specifically how many people opposed the decision. Oddly enough, the ECB didn’t vote on it! Draghi said that the majority was so wide that they didn’t need to vote. This is a nice way to hide the objections of any of the Northern participants and create a façade of unity over what was probably a contentious meeting. This is important to aid the psychological impact of the move.
Draghi said very little about the exchange rate, just that exchange rate movements were an inevitable spillover of monetary policy decisions taken for domestic reasons. “The exchange rate is not a policy target. It's important for price stability, for growth, but it's not a policy target. The movements in the exchange rate since three years were the outcome of diverging monetary policy cycles as well as divergent economic recovery paths between major jurisdictions. They were not intended, it was not an action geared to cause these exchange rate movements. They were the outcome.”
Conclusion: More EUR weakness to come While the ECB’s move did exceed expectations, it was nothing like the shock that the Bank of Japan delivered in October, with its wholly unanticipated move. Yet the range in EUR/USD was almost the same as the range in USD/JPY on that day (both around 3%). This suggests that the positioning in EUR is lighter than it was in JPY. If so, there is still more room for short EUR positions. The push may come from this weekend’s election in Greece (see below).
Saudi king dies; Brent prices jump Saudi Arabia’s King Abdullah has died. His successor is Prince Salman (79), Abdullah’s half-brother. Prince Muqrin, another half-brother and the youngest of his generation (at 69), is the new Crown Prince as expected. Brent prices rose on speculation that Saudi Arabia will cut back on production to push up the price in order to ensure that it has enough money for a smooth succession. However, the rhetoric in Davos has emphasized the likelihood of a recovery in oil prices over the next year, as is reflected in the oil futures curve (future oil prices are sharply higher than spot prices, which is the opposite of the usual situation in the oil market). I think the current Saudi policy has broad support in the Kingdom, as they have always taken a long-term view of the market, and so I do not expect them to change policy and do not expect today’s rally in Brent to last.
Today’s highlights: Friday is a PMI day. In China, the preliminary HSBC manufacturing PMI for January rose slightly to 49.8 from 49.6. While it remained in contractionary territory, the slight improvement (in contrast to the decline that the market was expected) suggests that China’s stimulus measures have helped to stabilize the country. That didn’t help to stabilize AUD and NZD, however. We also get the preliminary manufacturing and service-sector PMI data from several European countries and the Eurozone as a whole.
In the UK, retail sales for December are expected to fall, a turnaround from the previous month. The switch in interest rate votes from the two MPC members on the fears of low inflation, seem to have entrenched the negative sentiment towards the pound. Therefore, a weak retail sales figure could leave GBP vulnerable.
In the US, existing home sales for December are forecast to rise. The housing starts and building permits released earlier this week were consistent with an improving housing market. If the existing home sales are in line with a strong housing sector, this may be USD-supportive. Chicago Fed national activity index and Conference Board leading index, both for December are also coming out.
Canada’s CPI for December is expected to decelerate. Following Wednesday’s surprise rate cut, a drop in the inflation rate could ignite speculation about further rate cuts and could trigger a push higher in USD/CAD.
As for the speakers, Bank of England Governor Mark Carney speaks in Davos.
This weekend: Greece goes to the polls The most recent polls confirm that the SYRIZA coalition is likely to win the Greek election this weekend. It’s still questionable whether they will get enough votes to govern by themselves or whether they will need to form a coalition.
What are the policies of this party? Writing in the FT this week, party leader Alexis Tsipras said that his party offers “policies that will end austerity, enhance democracy and social cohesion and put the middle class back on its feet.” SYRIZA is not threatening to leave the Eurozone. He pledged that “A SYRIZA government will respect Greece’s obligation, as a eurozone member, to maintain a balanced budget, and will commit to quantitative targets.” His program has two main goals: ending austerity and renegotiate the debt.
How to maintain a balanced budget while ending austerity? Simple: increase revenues. “We will stand up to the tax-evading economic oligarchy,” he said. In fact it’s not just the rich who evade taxes; The Economist described tax evasion in Greece as “a national sport,” with over 40% of the population estimated to evade paying some EUR 30bn a year or more in taxes. That alone would be enough to put the government’s budget into surplus.
Tsipras called Greece’s “staggering” debt/GDP ratio of 177% “unsustainable” and called for renegotiation, which he correctly pointed out was exactly what Germany itself had to do with its war debt following WWII. This seems reasonable to me. There’s no way a country with 25% unemployment can pay down its debt without some growth. The costs of a long stagnation seem far more important than the loss associated with the debt restructuring, for creditors as well as for Greece.
There are many mainstream economists who recommend something similar in order to restart the Eurozone economy. The only problem is that few of them are German.
It’s clear that the negotiations will be tough and there will be many tense moments when the fate of the Eurozone seems to hang in the balance. But I expect the election of SYRIZA would be a good thing for Europe in that it would demonstrate that a change in policy can be accomplished without voting in the radical Right, whom I see as a much bigger threat to Europe. SYRIZA’s election and the successful renegotiation of its debt could prove a victory for European democracy, which is increasingly necessary for the Eurozone to continue.
Currency Titles:
EUR/USD plunges after Draghi announces QE
EUR/JPY near the 134.15 support line
GBP/USD trades below 1.5000
Gold struggles around 1300
WTI continues trendless
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EUR/USD plunged on Thursday after the ECB unleashed a larger and longer than anticipated QE program. The pair fell below the support (turned into resistance) line of 1.1460 (R1) and hit support at 1.1315 (S1). The short-term bias remains to the downside and I would expect a move below 1.1315 (S1) to set the stage for extensions towards the 1.1140 (S2) barrier, determined by the low of the 17th of September 2003. Yesterday’s strong downside momentum is also visible on our daily momentum studies. The RSI, already within its oversold territory, hit resistance near its 30 line and moved lower, while the daily MACD continued falling within its negative territory. In the bigger picture, the price structure still suggests a longer-term downtrend. The pair is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.1315 (S1), 1.1140 (S2), 1.1025 (S3).
• Resistance: 1.1460 (R1), 1.1540 (R2), 1.1650 (R3).
EUR/JPY also tumbled after the decision of the ECB. The pair dipped below the support (turned into resistance) line of 135.75 (R1) and hit support near the 134.15 (S1) line, defined by the low of the 16th of October. The short-term picture remains negative in my view, and thus, I would expect e move below 134.15 (S1), to pull the trigger for the 133.00 (S2) area. It is worth mentioning that the 133.00 (S2) barrier stands fractionally close to the 3rd price objective of the head and shoulders formation identified on the daily chart, completed on the 30th of December. Our daily momentum studies continue to indicate accelerating negative momentum and support further declines. The 14-day RSI stays within its oversold zone pointing down, while the daily MACD moved deeper into its negative territory.
• Support: 134.15 (S1), 133.00 (S2), 131.30 (S3).
• Resistance: 135.75 (R1), 137.65 (R2), 139.35 (R3).
GBP/USD fell on Thursday, breaking below the support (turned into resistance) line of 1.5035 (R1), determined by the low of the 8th of January. The rate also slid below the psychological round figure of 1.5000. Yesterday’s move confirmed a forthcoming lower low on the daily chart and, in my humble opinion, signaled the continuation of the longer-term downtrend. I would now expect the rate to continue lower and challenge the support territory of 1.4820 (S1), defined by the lows of March and July 2013. As long as Cable is trading below the 80-day exponential moving average, the overall picture stays negative in my view.
• Support: 1.4820 (S1), 1.4640 (S2), 1.4350 (S3).
• Resistance: 1.5035 (R1), 1.5075 (R2), 1.5200 (R3).
Gold made an attempt to escape from the 1300 (R1) psychological area but failed to do so and gyrated around that number. A clear and decisive break above that key area is likely to extend the bullish wave of the precious metal and perhaps challenge our next obstacle at 1320 (R2), marked by the high of the 14th of August. Nevertheless, I would remain careful about another pullback as there is negative divergence between the RSI and the price action. Moreover, the MACD, although positive, moved lower after crossing below its trigger. On the daily chart, gold accelerated higher after completing an inverted head and shoulders pattern on the 12th of January, and this keeps the medium-term technical picture positive. The price objective of the formation stands around 1340 (R3).
• Support: 1280 (S1), 1270 (S2), 1255 (S3).
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3).
WTI continued trading in a trendless mode yesterday. With no clear trending conditions in the short-term, I would maintain my “wait and see” stance until I get clearer directional signs. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, since there is still positive divergence between the daily oscillators and the price action, I would prefer to wait for the momentum indicators to confirm the price action before getting confident again about the overall down path.
• Support: 46.50 (S1), 45.85 (S2), 44.80 (S3).
• Resistance: 47.35 (R1), 48.20 (R2), 49.20 (R3) .
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Market Analysis 26/01/2015
Language English
SYRIZA wins; now what? The left-wing SYRIZA party won the Greek election, as expected. At the time of writing, it is estimated to have 149 seats in the 300-seat Parliament, meaning that it must enter into some sort of coalition in order to have a majority. This will complicate matters, as on the one hand, all the potential coalition partners only agree with parts of the SYRIZA platform, and on the other hand, it will be hard to govern and to manage difficult debt negotiations with only a tiny majority. Not to mention that SYRIZA itself is a coalition of various factions, not all of whom agree with their leader Alexis Tsipras’ moderate views.
“There will neither be catastrophic clash nor will continued kowtowing be accepted,”Tsipras told supporters. He said the Greek people have given him “a mandate for national revival.”
As I mentioned in Friday’s comment, I think the SYRIZA victory is a good thing. I think Tsipras will encourage a long-overdue conversation in Europe about whether the current path of austerity is the best way to get Europe growing again and enable countries to repay their debts. The success of SYRIZA is also likely to encourage people in other fiscally troubled countries, such as Spain and Portugal, to vote for parties outside the mainstream. There may be some significant changes coming to European economic policy. We will know more later today, when the regular Ecofin meeting will probably discuss what to do about Greece. Dutch Finance Minister Jeroen Dijsselbloem, who chairs the meetings, has said that while there is “room to manoeuvre” with Greece over its adjustment program, there’s little support within the group for a haircut on Greek debt.
What are the risks?The problem is, some of what Tsipras wants is contradictory. He intends to ask the Eurozone to extend Greece’s debt and agree to a more expansive fiscal policy. It’s questionable whether they will extend the debt, and if they do, why should they simultaneously allow a more expansive fiscal policy? He plans on squaring this circle by improving tax collection, although that has never been possible before. We’ll see if he can do it any better. In any event, the first problem will be to prevent capital flight out of Greece and to secure within 10 days an extension of the ECB’s emergency liquidity assistance, which is what’s keeping the Greek banking system afloat. Without that, the banking system will quickly grind to a halt. He also has to improve tax collection, as many citizens apparently stopped paying some of their taxes on the assumption that taxes that SYRIZA has opposed in the past would no longer have to be paid. This is crucial because if taxes don’t meet their target, the IMF may not certify that Greece is meeting its obligations with regards to the final EUR 7.2bn tranche of the support program. Without that money, Greece would have serious problems. I think the odds are that, initially at least, the headlines suggest more confrontation and are therefore negative for the euro. Later as reality sinks in, the two sides are likely to strike a deal that keeps Greece in the euro and keeps pressure on the country, with perhaps some face-saving concessions to allow Tsipras to accept the terms.
More on QE: The euro came under some pressure on Friday after Benoit Coeure, the ECB’s head of market operations, said “If we haven’t achieved what we want to achieve, then we’ll have to do more, or we have to do it for longer.” Italian Central Bank Gov. Ignazio Visco also said that “we are open-ended” about asset purchase. This was only confirming what ECB President Draghi implied at his press conference: that if inflation hasn’t gone back to around 2% by the time the QE purchases are scheduled to end in Sept. 2016, they will have to extend them. Nonetheless, this was the first hint that they might increase the amount of purchases as well as lengthen the time. Of course this is a 2016 event we are talking about, but as we’ve seen with the Bank of Japan, there can be surprises. EUR-negative.
Japan’s trade deficit for December narrowed more than expected on stronger-than-expected exports. This could be the first sign that the weaker yen is finally feeding through to increased exports. Yet the yen weakened immediately following the report, perhaps because the minutes of the Dec. 18-19 Bank of Japan meeting, released at the same time, showed continued determination to keep loosening until they hit their 2% inflation target.
Today’s highlights: During the European day, we get the German IFO survey for January. All three indices are expected to have risen as falling oil prices boost sentiment. This comes on top of the strong ZEW survey released last Wednesday, yet it will probably not be enough to reverse the negative sentiment towards EUR. For example, Friday’s better-than-expected PMIs for the Eurozone did nothing to halt the currency’s decline.
Rest of the week:As for the rest of the week, the highlight will be the FOMC meeting on Wednesday. The minutes of the previous meeting showed that the Fed isn’t concerned about the stronger dollar and was concerned about the tight labor market, showing that it remained on track to hike rates. However, the weakness in the European and Canadian economies could prompt Fed officials to reassess their outlook for the US economy and push back expectations for a rate hike. There is no press conference scheduled after the meeting.
On Tuesday, the 1st estimate of UK Q4 GDP is expected to show a rise in the pace of growth from Q3. Given the weak industrial production data in October and November, we wouldn’t be surprised with a below consensus growth rate. Along with the falling inflation rate, this is likely to keep the markets convinced that the first rate hike won’t be until after the general election in May, keeping GBP/USD under pressure. In the US, we get durable goods for December.
On Wednesday, besides the FOMC meeting, the Reserve Bank of New Zealand meets. At its December meeting, the Bank stated that the next move in rates was likely to be up. However, following the sharp fall in inflation in Q4, below the lower boundary of the Bank’s range target of 1%-3%, they may change their stance and return to neutral again. In Australia, the Q4 CPI is anticipated to ease in pace. The market seems to give more attention to the trimmed mean CPI, which is also expected to decelerate a bit. The threat of plunging inflation, dragged down mainly by the low oil prices, increase the likelihood for the RBA to cut rates in its February meeting. This could put further downward pressure on AUD.
On Thursday, we get the German CPI for January, starting with several Lander releasing their data in the course of the morning. As usual, we would look to the larger states for guidance on where the headline figure will come at. Overall, the forecast is for the national CPI to fall to deflation, which could prove EUR-negative.
Finally on Friday, Eurozone’s preliminary CPI for January is expected to fall at an accelerating pace, suggesting that the deflationary pressures have increased in the region. In the US, the 1st estimate of GDP for Q4 is expected to show that the US economy expanded at a slower pace than in Q3. The 1st estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have eased from the Q3.
Currency Titles:
EUR/USD gaps down as Syriza wins Greek election
GBP/JPY finds support slightly below 176.00
AUD/USD accelerates after breaking below 0.8000
Gold consolidates below 1300
WTI falls sharply
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EUR/USD continued falling on Friday and gapped down on Monday as the anti-austerity party “Syriza” won Greece’s snap elections on Sunday. During the early European morning, the rate gyrates near our support zone of 1.1140 (S1), determined by the low of the 17th of September 2003. The short-term bias remains to the downside and thus I would expect a clear and decisive move below that support area to see scope for extensions towards the next zone of 1.1025 (S2), the inside swing defined by the high of the 1st of September 2003. However, bearing in mind that the fall since Thursday was too steep, and that today, all the German Ifo indices for January are forecast to have risen, I would be wary of an upside corrective move before the bears pull the trigger again.
• Support: 1.1140 (S1), 1.1025 (S2), 1.1000 (S3)
• Resistance: 1.1315 (R1), 1.1460 (R2), 1.1540 (R3)
GBP/JPY slid below the 177.00 (R1) line and hit support marginally below 176.00 (S1). The RSI continued lower after falling below its 50 line, while the MACD crossed below both its zero and signal lines, confirming the recent negative momentum. On the daily chart, the picture stays cautiously negative. I would like to see a move below the 176.00 (S1) area and the 200-day moving average before trusting that medium term down path again. It is worth noting that the 176.00 (S1) area coincides with the 61.8% retracement level of the 15th of October – 5th of December rally and also with the 161.8% extension level of the width of a failure swing top completed on the 6th of January. A clear move below the 176.00 (S1) territory could probably pull the trigger for the psychological barrier of 175.00 (S2).
• Support: 176.00 (S1), 175.00 (S2), 173.90 (S3)
• Resistance: 177.00 (R1), 179.15 (R2), 180.30 (R3)
AUD/USD continued its slide on Friday, falling below the psychological hurdle of 0.8000 (R1) and accelerating lower. During the early European morning Monday, the rate is trading near our support obstacle of 0.7870 (S1), where a clear break is likely to have larger bearish implications and perhaps aim for the key line of 0.7700 (S2), marked by the low of the 13th of July 2009. The recent negative sentiment towards this pair is also visible on our near-term momentum studies. The RSI moved deeper within its oversold territory, while the MACD stands below its trigger and continues to fall. As far as the bigger picture is concerned, the break below the 0.8000 (R1) psychological hurdle is the move that triggered the continuation of the longer-term downtrend.
• Support: 0.7870 (S1), 0.7700 (S2), 0.7500 (S3)
• Resistance: 0.8000 (R1), 0.8035 (R2), 0.8075 (R3)
Gold traded in a consolidative mode on Friday, staying slightly below the psychological area of 1300 (R1). A clear and decisive break above that key area is likely to extend the short-term uptrend and perhaps challenge our next obstacle at 1320 (R2), marked by the high of the 14th of August. Nevertheless, I would remain cautious about a potential downside corrective move as there is still negative divergence between the RSI and the price action. Moreover, the MACD, already below its trigger, continued declining. On the daily chart, gold accelerated higher after completing an inverted head and shoulders pattern on the 12th of January, and this keeps the medium-term technical picture positive. The price objective of the formation stands around 1340 (R3).
• Support: 1280 (S1), 1270 (S2), 1255 (S3)
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3)
WTI tumbled on Friday, but today it found some buy orders near 44.30 (S2) and rebounded somewhat. In my view, Friday’s fall turned the short-term bias back to the downside. Therefore, although I see signs that the rebound may continue for a while, I would expect sellers to seize control at some point and aim for another test near the support of 44.30 (S2). A clear move below that line could prompt extensions towards the 42.50 (S3) hurdle, determined by the low of the 12th of March 2009. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, since there is still positive divergence between the daily oscillators and the price action, I would prefer to wait for the momentum indicators to confirm the price action before getting confident again about the overall down path.
• Support: 44.75 (S1), 44.30 (S2), 42.50 (S3)
• Resistance: 45.75 (R1), 46.50 (R2), 47.35 (R3)
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Market Analysis 27/01/2015
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Greek election – more thoughts Sunday’s election in Greece was an event that will have repercussions for the Eurozone for several months. Indeed, given the impact that it may have on other countries’ elections, it could be the defining event for Europe in 2015. Note the strong relationship between SYRIZA and Spain’s Podemos Party, as demonstrated by the presence of the leader of Podemos, Pablo Iglesias, on the podium with SYRIZA’s Alexis Tsipras yesterday (see photo). SYRIZA’s victory may boost Podemos’ popularity in Spain, which is a much bigger issue for the Eurozone than Greece is because of the general election in Spain this fall.
Clashes comingThe EUR recovered somewhat yesterday, probably on a “sell the rumor, buy the fact” response as the SYRIZA victory was expected. Moreover, Tsipras has been consistently moving to the center as the election approached, and his party’s coalition with the relatively conservative Independent Greeks further reassures investors. Nonetheless, I believe there are more shocks in store for the FX market from the election. The Greek press reports that the new government already has legislation ready to send to Parliament reversing some of the structural reforms implemented in the Troika program. I’m not sure how well that will sit with Greece’s creditors. The legislation could disrupt Greece’s exit from its five-year bailout program, which expires at the end of February, and leave the country’s banks without a liquidity backstop. Greek banks rely on the ECB for funding, but the ECB has warned it will stop providing liquidity unless Greece reaches a new agreement with its creditors.
Debt relief has dominated the headlines, but that really isn’t the main issue. As the FT pointed out yesterday, the maturities are already quite long (average of 16.5 years, double that of Italy or Germany) and Europe may be willing to extend them even further. Rather, the two main points are the fiscal outlook and structural reforms. On the former issue, the government is supposed to be running a substantial surplus before interest payments, but tax collection has plummeted ahead of the election and it is now running a large deficit again. The first question is whether the government will be willing to raise taxes enough to meet its budget targets, or Brussels will be willing to lower the targets. On structural reform, much depends on what legislation is introduced and how Brussels reacts. So far, the indications are that the two sides are very far apart.
Best case: The EU softens its targets for Greece and extends debt maturities further. In return, the new Greek government commits to further structural reforms. It’s difficult to reconcile this with SYRIZA’s platform, however. They could do it and blame it on the need to keep the Independent Greeks in the coalition. EUR would probably stabilize temporarily, but QE keep it under pressure.
Worst case: No agreement. The various participants argue until July/August, when EUR 6.7bn in bonds mature, and then Greece defaults. Greece either has capital controls imposed or leaves the Eurozone. Disaster for EUR.
Middle case: No agreement reached, but default averted somehow. This might need to involve either a new election or at least a change in the coalition members. Even this scenario involves considerable risk for EUR. EUR continues on declining trend as increased tension plus QE pressure the currency.
CHF weakens after the Greek election went as expected or even better, meaning there was less need for safe havens. It may recover in coming weeks however if tensions there mount.
RUB collapsed after Standard & Poor’s cut Russia’s rating below that of Moody’s and Fitch, who were already at the lowest investment grade, and left Russia on negative watch. The rising tensions in Ukraine and talk of additional sanctions didn’t help, either.
Today’s highlights: The 1st estimate of UK Q4 GDP is expected to show an acceleration in the pace of growth from Q3. Given the weak industrial production data in October and November, we wouldn’t be surprised with a below-consensus growth rate. Along with the falling inflation rate, a disappointment in the growth figure could keep the markets convinced that the first rate hike won’t be until after the general election in May. This is likely to keep GBP/USD under pressure.
In the US, we get durable goods for December. The headline figure and durable goods excluding transportation equipment, are both estimated to rebound from the previous month. S & P/Case-Shiller house price index for November is expected to have decelerated from October. The Richmond Fed manufacturing index, the Conference Board consumer index and the preliminary Markit service-sector PMI all for January are also to be released. These are likely to keep confidence up and the USD supported.
We have no speakers on Tuesday’s agenda.
Looking ahead to tomorrow’s FOMC meeting:There are two countervailing trends that the Federal Open Market Committee (FOMC) will have to deal with. On the one hand, domestic factors are improving faster than expected. On the other hand, overseas factors are going in the opposite direction quickly. Which should they focus on? In my experience, the Fed generally puts priority on the domestic economy and so I do not expect any change in the language this month.
Domestically, the labor market has improved faster than expected. The unemployment rate of 5.6% is almost within the range of what the Fed considers to be “full employment,” which is 5.2%-5.5%. The main thing preventing them from raising rates immediately is inflation. Both wage and price inflation are well below their target, and especially wage inflation has barely budged despite significantly less slack in the labor market. Low inflation will allow the Fed to remain “patient” despite employment approaching its target level. Some economists believe however that wage inflation is just in the early stages of moving up in response to labor market tightening. If the Committee agrees, then it should prove no obstacle to a tightening mid-year.
However outside the US, the trend of policy is definitely in the opposite direction. Canada, Denmark, and the Eurozone have all loosened policy in the last couple of weeks in response to the growing deflationary threat. Nonetheless, I think the Fed’s response is likely to be different. While certainly some states are likely to be hurt by the fall in oil prices, as may some banks, overall lower oil prices are beneficial for the US economy and so will be seen to be a boost, perhaps even an inflationary boost (while energy prices decline, prices of other goods may increase as demand increases). Moreover, at the last FOMC meeting, “although the projected path of the dollar was revised up, the staff revised down its estimate of how much the appreciation of the dollar since last summer would restrain projected growth in real GDP.” So the Committee has already discussed the stronger dollar resulting from divergent monetary policy and concluded that it is not a major worry for the US economy.
As a result, I still believe the FOMC is targeting a mid-year hike in rates. The Committee is likely to ignore the slow rise of wages as long as survey measures of wage intentions, such as the National Federation of Independent Businesses, continue to show a rising trend and payroll employment continues to rise 200k a month. Hence I do not expect any substantial change in the FOMC’s language this week.
Currency Titles:
EUR/USD slightly below the resistance of 1.1315
USD/JPY in a short-term sideways mode
EUR/GBP hits resistance at 0.7500
Gold corrects lower
WTI hits support at 45.00
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EUR/USD edged higher yesterday and is currently trading slightly below our resistance hurdle of 1.1315 (R1). Our short-term momentum studies suggest that the rebound may continue for a while. A break above the 1.1350 (R1) obstacle is likely to prompt extensions towards the 1.1460 line, defined by the low of the 16th of January. Nonetheless, since the rate is trading below the black downtrend line, the short-term path remains negative in my view and I would treat yesterday’s rebound, or any extensions of it, as a corrective move before the next leg down. The broader trend is to the downside too. The pair is printing higher peaks and higher troughs below both the 50- and the 200- day moving averages. Therefore, I would expect sellers to eventually take control in the not-too-distant future and drive the battle below 1.1100 (S1). Such a move could see scope for extensions towards the next support zone of 1.1025 (S2), the inside swing defined by the high of the 1st of September 2003.
• Support: 1.1100 (S1), 1.1025 (S2), 1.1000 (S3)
• Resistance: 1.1315 (R1), 1.1460 (R2), 1.1540 (R3)
USD/JPY rebounded after finding support fractionally above the 117.15 (S1) line, but the advance was halted slightly below the resistance hurdle of 118.85 (R1). The rate has been oscillating between these two barriers since the 19th of the month and hence I would expect the forthcoming wave to be to the downside, perhaps for another test at the 117.15 support zone. On the daily chart, the rate is still trading above both the 50- and the 200-day moving averages, but it’s been also trading within a possible triangle formation. As a result, I would wait for an escape out of the pattern before making any assumptions about the continuation or end of the longer-term uptrend.
• Support: 117.15 (S1), 115.50 (S2), 113.80 (S3)
• Resistance: 118.85 (R1), 119.95 (R2), 120.80 (R3)
EUR/GBP hit resistance near the psychological line of 0.7500 (R1) and retreated thereafter. I would now expect another test near the 0.7400 (S1) zone. If sellers are strong enough to overcome that support zone we may experience extensions towards the 0.7320 (S2) barrier, determined by the low of the 31st of December 2007. The accelerating downside momentum is visible on our daily oscillators as well. The 14-day RSI is back within its oversold territory pointing down, while the daily MACD fell deeper within its negative field. As for the bigger picture, the downside exit of the triangle pattern on the 18th of December signaled the continuation of the longer-term downtrend, thus the overall outlook stays negative in my view.
• Support: 0.7400 (S1), 0.7320 (S2), 0.7230 (S3)
• Resistance: 0.7500 (R1), 0.7600 (R2), 0.7700 (R3)
Gold continued pulling back on Monday, to fall below 1280 (R1) and to trade near the black uptrend line taken from back at the low of the 2nd of January. Given our momentum signs I would expect the corrective phase to continue, perhaps even to below 1270 (S1). The RSI fell below its 50 line and is now pointing down, while the MACD, already below its signal line, just touched its toe below its zero line. A move below 1270 (S1), could challenge the 1255 (S2) line, which lies fractionally close to the 38.2% retracement level of the 2nd – 22nd of January up leg. Our daily momentum studies corroborate my view as well. The 14-day RSI exited its overbought territory and the daily MACD shows signs of topping. On the daily chart, since I don’t see major bearish trend reversal signals and since the possibility for a forthcoming higher low still exists, I would see a mildly positive medium term picture and I would treat any possible future declines as a corrective phase for now.
• Support: 1270 (S1), 1255 (S2), 1238 (S3)
• Resistance: 1280 (R1), 1300 (R2), 1320 (R3)
WTI rebounded strongly on Monday, hit resistance at 46.40 (R1) and pulled down to find support near the 45.00 (S1) line. Our momentum studies are still in a rising mode, thus an up leg and another test near 46.40 (R1) are possible. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, since there is still positive divergence between the daily oscillators and the price action, I would prefer to wait for the momentum indicators to confirm the price action before getting confident again about the overall down path.
• Support: 45.00 (S1), 44.30 (S2), 42.50 (S3)
• Resistance: 46.40 (R1), 47.35 (R2), 48.20 (R3)
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Market Analysis 28/01/15
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Singapore joins the easing parade Overnight the Monetary Authority of Singapore (MAS) became the latest central bank to ease policy when it unexpectedly cut its inflation forecast for 2015 and said that it would seek a slower appreciation of the SGD as a result. (Singapore does not control interest rates, but rather uses FX appreciation as its monetary policy tool.) “(T)he outlook for inflation has shifted significantly since the last Monetary Policy Statement in October 2014, largely due to the decline in global oil prices,” it explained, as it cut its forecast for headline inflation to -0.5% to +0.5% from the +0.5% to +1.5% expected in October. MAS has only two scheduled policy announcements a year, so this between-meeting announcement was quite unusual – the first since the 9/11 attacks of 2001. The MAS thus joins the Reserve Bank of India, the Bank of Canada, Danmarks Nationalbank, and the ECB in easing policy. Their action immediately raises the obvious question: what will the FOMC and the Reserve Bank of New Zealand (RBNZ) do tonight? See below for our view.
Australia’s Q4 CPI rose only +0.2% qoq (+1.7% yoy), below expectations of +0.3% (1.8%) and a marked slowdown from the +2.3% annual pace of growth in Q3. On the other hand, the trimmed mean CPI accelerated on a qoq basis to +0.7% from +0.3% (market expectation: +0.5%), but it too slowed on a yoy basis to +2.2% from +2.4%. The market emphasized the acceleration in the qoq growth of trimmed mean CPI and AUD gained on the news as expectations of a rate cut at next week’s RBA meeting faded sharply. In this respect, AUD is somewhat of an anomaly to the global trend. I don’t expect this to last however as I can’t see how a country whose major exports are coming under such pressure can buck the global deflationary trend indefinitely.
Today’s highlights: During the European day, Norway’s AKU unemployment rate for November is expected to remain unchanged. The official unemployment rate for the same month had declined, thus the possibility for a positive surprise could strengthen NOK somewhat.
FOMC statement: points to look for The big event of the day of course is the FOMC meeting. I explained yesterday why I don’t expect any change in their view and look only for minor changes in the statement. A largely unchanged statement would probably be USD-supportive. The points to watch in the statement include:
Will the Fed remain “patient”? The Fed said in December “that it can be patient in beginning to normalize the stance of monetary policy.” This replaced the previous mantra that it would hold the Fed funds rate steady “for a considerable time” after ending its QE program. Chair Janet Yellen defined “patient” as meaning for at least two meetings, i.e. not until the end-April meeting. Several FOMC officials have referred to “mid-year” in their speeches. I expect them to retain this language. Any change would be dramatic. (On the other hand, it’s likely that they will remove the reference to “considerable time,” as that was inserted just to explain the shift to “patient.”)
How has its assessment of the economy changed? Economic growth was described as “moderate” in December, even though Q3 GDP was rising at a 5.0% qoq SAAR. GDP figures for Q4 are out Friday, after the meeting, and are expected to show some moderation in growth to +3.0% qoq SAAR.
How will they assess employment and inflation, their two targets? As mentioned yesterday, employment is much closer to their target than inflation is. The unemployment rate of 5.6% is almost within the range of what the Fed considers to be “full employment,” which is 5.2%-5.5%, while the payroll gains of +250k for the last three months have been excellent. People will be watching to see whether they repeat that “underutilization of labor resources continues to diminish” or whether they refer to the surprisingly weak average hourly earnings numbers in December’s labor market statistics.
As for inflation, the core personal consumption expenditure index, the Fed’s favorite measure of inflation, is running only at 1.4% yoy and is forecast to drop to 1.1% in the Q4 GDP figures. That’s well below their 2% target. Do they still expect “inflation to rise gradually toward 2%”? That would be bullish USD. On the other hand, any change to show more concern about low inflation would be negative for the dollar. Also of course their view of inflation expectations is always of interest, especially as market-based estimates of expectations continue to decline. In the December statement, they said that inflation was below target in part because of “declines in energy prices,” but that they expected these effects to be “transitory.” People will especially be looking for any change in their view of the implications of lower oil prices, given that this factor was specifically cited by Bank of Canada and MAS in cutting rates.
Does the global outlook feature in their thinking? Last month’s statement made no mention of foreign economic developments. Since then, many central banks have eased policy in the face of slowing economies and the threat of deflation. Will the Committee mention this fact and, if so, what conclusions (if any) will they draw for US policy? (I don’t think they will.)
In short, employment is moving closer to the Fed’s target but inflation remains below where they want it to be. This combination allows them to remain “patient” and argues for no significant change in the statement. The message is likely to remain that so long as the labor market continues to improve and they continue to expect inflation to return to 2% in the medium term, they can begin to normalize rates around the middle of the year. This is more or less what the market is forecasting, as the Fed funds futures contracts are discounting a 25 bps FF rate from August.
RBNZ meets too Near the close of the US session, the spotlight will be on the Reserve Bank of New Zealand policy meeting. The RBNZ is expected to leave its policy rate unchanged at 3.5%, but will probably remove its tightening bias and remain neutral this time. At its December meeting, the Bank stated that the next move in rates was likely to be up. However, following the sharp fall in inflation in Q4 to below the lower boundary of the Bank’s range target of 1%-3%, we believe there is a strong possibility that they change their stance and return to neutral again. Such a move would probably put NZD under selling pressure. The country’s trade balance for December is also coming out.
As for the speakers, Bank of England Governor Mark Carney speaks. In his most recent comments, Gov. Carney said that investors are too relaxed about the possibility of UK interest rates rising, but the markets have largely ignored his comments.
Currency Titles:
EUR/USD continues higher
USD/JPY stays within a range
GBP/USD hits resistance at 1.5200
Gold rebounds from near the uptrend line
WTI trades within a short-term upside channel
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EUR/USD extended the rebound yesterday , breaking above 1.1300 (S1). Such a move could challenge the resistance area of 1.1460 (R1), marked by the low of the 16th of January 2015. Our near-term momentum studies support the notion. The RSI edged higher and now lies near its 50 line, while the MACD, already above its trigger, is getting closer to its zero line. However, as long as the pair is trading below the black downtrend line, the short-term trend remains to the downside in my view and I would treat the recent rebound or any possible extensions of it as a corrective phase before sellers seize control again. The broader trend is to the downside as well. Therefore, I would expect sellers to eventually take control in the not-too-distant future and pull the trigger for another test near 1.1100 (S3).
• Support: 1.1300 (S1), 1.1230 (S2), 1.1100 (S3)
• Resistance: 1.1460 (R1), 1.1540 (R2), 1.1640 (R3)
USD/JPY continued lower on Tuesday, hit support fractionally above 117.30 (S1) and rebounded. The rate has been oscillating between that support zone and the resistance hurdle of 118.80 (R1) since the 19th of the month and as a result I believe that we are likely to see another test near the 118.80 (R1) area in the very close future. A break above that resistance is likely to target the next obstacle at 119.30 (R2), determined by the high of the 12th of January. On the daily chart, the rate is still trading above both the 50- and the 200-day moving averages but it's also been trading within a possible triangle formation. Therefore, I would wait for an escape out of the pattern before making any assumptions about the continuation or the end of the longer-term uptrend.
• Support: 117.30 (S1), 116.00 (S2), 115.50 (S3)
• Resistance: 118.80 (R1), 119.30 (R2), 119.90 (R3)
GBP/USD surged on Tuesday and reached the resistance hurdle of 1.5200 (R1). A clear move above that area is likely to aim for the next resistance of 1.5270 (R2). Yesterday's positive sentiment towards Cable is visible on our short-term oscillators as well. The RSI moved above its 50 line to hit resistance slightly below its 70 line, while the MACD obtained a positive sign. As for the broader trend, I retain the view that as long as Cable is trading below the 80-day exponential moving average the overall trend remains to the downside. However, there is positive divergence between both our daily oscillators and the price action. Hence, I would prefer to wait for the momentum indicators to confirm the price action before getting confident again in that downtrend.
• Support: 1.5060 (S1), 1.4950 (S2), 1.4820 (S3)
• Resistance: 1.5200 (R1), 1.5270 (R2), 1.5420 (R3)
Gold firmed up on Tuesday after finding support at the crossroad of the 50-period moving average, the black uptrend line taken from back at the low of the 2nd of January, and the 1275 (S1) barrier, which lies fractionally close to the 23.6% retracement level of the 2nd – 22nd of January up leg. However, taking into account that the advance stayed limited below the 1300 (R1) zone, and that there is still negative divergence between the RSI and the price action, I would prefer to see a clear close above 1300 (R1) before getting confident about further bullish extensions. Our daily momentum studies corroborate my view as well. The 14-day RSI exited its overbought territory and the daily MACD shows signs of topping. On the daily chart, since the possibility for a forthcoming higher low still exists, I would see a mildly positive medium term picture and I would treat any possible future declines as a corrective phase for now.
• Support: 1275 (S1), 1255 (S2), 1238 (S3)
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3)
WTI raced higher after finding support at around 45.00 (S1) to hit resistance marginally above the 46.40 (R1) line. Subsequently, it retreated and gave back a large portion of its gains. Nevertheless, since WTI is trading within the short-term upside channel, I would expect the forthcoming wave to be to the upside. Maybe another test near the 46.40 (R1) area. On the daily chart, WTI is still printing lower peaks and lower troughs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, since there is still positive divergence between the daily oscillators and the price action, I would prefer to wait for the momentum indicators to confirm the price action before getting confident again about the overall down path.
• Support: 45.00 (S1), 44.30 (S2), 42.50 (S3)
• Resistance: 46.40 (R1), 47.35 (R2), 48.20 (R3)
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IronFX Daily Commentary 29/01/2015
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FOMC stands pat, RBNZ more dovish The Fed and RBNZ were both largely as we expected: the FOMC statement was largely unchanged while the RBNZ changed from a tightening bias to strictly neutral. As a result, the dollar rose against almost all the currencies we follow (JPY being the main exception), while the NZD was the biggest loser.
The FOMC statement was little changed from last time. The most important change was that it referred to “strong job gains” instead of “solid job gains,” meaning that the Committee is a bit more confident about the employment picture, and said the economy is expanding at a “solid pace” instead of a “moderate pace,” meaning they are more confident about the economy overall. They said that inflation is now running below target “largely” because of low oil prices (instead of “partly”) and added the phrase “inflation is anticipated to decline further in the near term,” but continued to say that they expect it to return to their 2% target. Perhaps most importantly, they qualified that prediction by saying inflation would return to 2% “over the medium term,” which sounds like they are pushing it out further into the future than before. In other words, they attribute the below-target inflation rate to the fall in oil prices but are looking through that, perhaps because “recent declines in energy prices have boosted household purchasing power” (another new line). They still expect inflation to come back to target, although they realize it may take longer than they had thought. As for the rest of the world, the only reference they made was to add “international developments” to the end of the long list of things they would be looking at as they assess the information that they’ll be monitoring.
The market view of the statement was mixed Fed funds rate expectations crashed – the expected Fed funds rate for Dec. 2017 was down a tremendous 11.5 bps. Ten-year yields were also down 10 bps. This may be because of the addition of the “over the medium term” phrase. On the other hand the dollar rose and stock prices fell because they did not retreat from their tightening bias – they are still on track to hike rates later this year, even if the market now thinks that the pace of tightening will be slower than previously expected. I remain a total USD-bull. The FOMC is clearly determined to begin the process of normalizing rates, which sets it apart from virtually all other central banks, and this should keep the USD underpinned.
The RBNZ on the other hand followed the global trend towards loosening In the Dec. 11th statement, Gov. Wheeler said that “Some further increase in the OCR (official cash rate) is expected to be required at a later stage.” This time however he said ”In the current circumstances, we expect to keep the OCR on hold for some time.” On top of which, he added that “Future interest rate adjustments, either up or down…” will depend on the data. So they went from a tightening bias to a neutral bias and even held out the possibility that the next move in rates would be a cut. The statement was focused on the downside risks to growth. Wheeler also continued to complain about the overvaluation of the NZD, a veritable tradition at the RBNZ:
While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.
He does have a point; according to Bloomberg’s PPP calculations, the NZD is about as overvalued as the CHF, the most overvalued currency, based on consumer prices and is far and away the most overvalued currency in the world based on producer prices, although the OECD methodology puts it only about 7% overvalued vs USD. Nonetheless, I still expect the NZD to do better than AUD. We’ll have to see whether the Reserve Bank of Australia also changes its bias at next week’s meeting. Currently, their policy is strictly neutral: they expect “a period of stability in interest rates.” After the various surprise loosening moves, from Denmark to Singapore and now New Zealand, I wouldn’t be surprised if Australia shifted too. In fact, the market is now likely to expect most central banks that don’t already have a loosening bias to shift.
Keep watching Greece The Greek situation has not settled down; on the contrary, it seems to be getting more and more agitated. Greek stocks were down another 9% or so yesterday while 3-year bond yields moved up 275 bps to 16.73%. Feb. 5th is the next pressure point, when the country’s emergency liquidity assistance (ELA), the ECB lifeline that keeps Greece’s banks afloat, is up for renewal at the same time as the Parliament reconvenes. The Greek situation still has the potential to roil the EUR more.
Today’s highlights: During the European day, the main release will be the German preliminary CPI for January. Before the headline figure is released, several regional states will release their January data. As usual we would look at the larger states for guidance on where the headline reading is going to come in at. The consensus is a decline to deflation, which could add further downward pressure on the Eurozone’s estimate CPI to be released on Friday. Overall, the forecast to fall to deflation, could prove EUR-negative. German unemployment rate for January is expected to remain unchanged from December.
Eurozone’s M3 money supply is forecast to have risen 3.5% yoy in December, a slight acceleration from 3.1% yoy in November. This will push the 3-month moving average to accelerate if the forecast is met. The bloc’s final consumer confidence for January is expected to remain unchanged from the preliminary print.
Sweden’s economic tendency survey for January is expected to increase marginally from the previous month.
In the US, we get the initial jobless claims for the week ended Jan.24. Pending home sales for December is forecast to decelerate. This is in line with the moderate increase in existing home sales in December.
In New Zealand, we get building permits for December.
We have no speakers on Thursday’s agenda.
Currency Titles:
EUR/USD remains below the black trend line
USD/JPY stays within a range
GBP/USD fails to break the 1.5200 resistance
Gold breaks below the near-term uptrend line
WTI break below the short-term upside channel
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Currencies Text:
EUR/USD declined yesterday and fell below 1.1300 again. The dip below that level could pull the trigger to challenge the support area of 1.1230 (S1). A break of that level is likely to see scope for further downward extensions, perhaps towards our next support of 1.1100 (S2). Our near-term momentum studies support the notion. The RSI moved lower after finding resistance at its 50-line, while the MACD, already below its zero line, seems willing to cross below its trigger line. On the daily chart, the pair is still trading below its 50- and 200-period moving averages, therefore the broader trend remains to the downside.
• Support: 1.1230 (S1), 1.1100 (S2), 1.1000 (S3)
• Resistance: 1.1400 (R1), 1.1540 (R2), 1.1630 (R3)
USD/JPY continued moving higher on Wednesday after finding support near the 117.30 (S1) support area. The rate has been oscillating between that support zone and the resistance hurdle of 118.80 (R1) since the 19th of the month. If it manages to overcome the resistance of the 200-period moving average line, I believe that we are likely to see another test near the 118.80 (R1) area in the near future. A break above that resistance is likely to target the next obstacle at 119.30 (R2), determined by the high of the 12th of January. On the daily chart, the rate is still trading above both the 50- and the 200-day moving averages, but it's also been trading within a possible triangle formation. Therefore, I would wait for break out of the pattern before making any assumptions for the longer-term bias.
• Support: 117.30 (S1), 116.00 (S2), 115.50 (S3)
• Resistance: 118.80 (R1), 119.30 (R2), 119.90 (R3)
GBP/USD declined after finding resistance at 1.5200 (R1). The failure to breach that hurdle is likely to push the rate lower, perhaps for another test of the 1.5060 (S1) support zone. Wednesday’s negative sentiment towards Cable is visible on our short-term oscillators as well. The RSI moved lower to find support at its 50 line, while the MACD showed signs of topping and crossed below its trigger line. As for the broader trend, I retain the view that as long as Cable is trading below the 80-day exponential moving average, the overall trend remains to the downside. However, there is positive divergence between both our daily oscillators and the price action. Hence, I would prefer to wait for the momentum indicators to confirm the price action before getting confident again in that downtrend.
• Support: 1.5060 (S1), 1.4950 (S2), 1.4820 (S3)
• Resistance: 1.5200 (R1), 1.5270 (R2), 1.5420 (R3)
Gold broke below the black uptrend line taken from the back at the low of the 2nd of January, but managed to stay above the 1275 (S1) strong support line. This support also happens to be the 23.6% retracement level of the 2nd – 22nd January advance. A break below that level is necessary to get confident for further declines. Our short-term momentum signs support the notion for further declines. The RSI fell below its 50-line and is pointing down, while the MACD fell below its zero and trigger lines. However, I would prefer to see a clear close below 1275 (S1) before getting confident about further bearish extensions. Our daily momentum studies corroborate my view for another leg down. The 14-day RSI exited its overbought territory and the daily MACD seems to have topped and crossed below its trigger line.
• Support: 1275 (S1), 1255 (S2), 1238 (S3)
• Resistance: 1300 (R1), 1320 (R2), 1340 (R3)
WTI break below the lower boundary of the short-term upside channel and found some buy orders near our 44.30 (S1) support line. A break below that level could see further downward extensions perhaps to our next support of 42.50 (S2). Looking at our near-term momentum signs they are both pointing sideways, therefore I would adopt a neutral stance and could not rule out a minor bounce until 45.00 (R1). I would like to wait for a clear break of the 44.30 (S1) support line to get confident for further declines. In the bigger picture, WTI is still printing lower lows and lower highs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, the positive divergence between the daily oscillators and the price action, give me another reason to remain neutral and to wait for the momentum indicators to confirm the price action about the overall down path.
• Support: 44.30 (S1), 42.50 (S2), 41.30 (S3)
• Resistance: 45.00 (R1) 46.40 (R2), 47.35 (R3)
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IronFX Daily Commentary 30/01/2015
Language English
Is the RBA next in line? Following the Reserve Bank of New Zealand’s (RBNZ) policy shift, the market naturally started thinking “who’s next?” and the AUD was the natural target. With the Reserve Bank of Australia (RBA) meeting next week, it’s the obvious candidate. AUD fell sharply as a result. Note that Denmark also eased further yesterday; it cut its CD rate by 15 bps to -0.50% and said the move follows its “purchase of foreign exchange in the market.” This shows the pressure on central banks to ease as their counterparts elsewhere do so. The Australian Business Review newspaper ran an article saying that “(p)ressure is building for the Reserve Bank to cut official interest rates, even as early as next week.” (It argued that the RBA should resist the pressure and not cut rates.) I think that even if it does not, it is likely to shift to an easing bias, much as the RBNZ shifted its bias, and that alone should be enough to weaken the currency further.
CHF weakens; SNB intervention? The AUD wasn’t the worst-performing G10 currency overnight. That honor went to CHF, which just barely nosed out the AUD. EUR/CHF in particular jumped 1.7%. Perhaps investors feel that the decline in CHF went too far. Perhaps the Swiss National Bank (SNB) is covertly intervening – as mentioned above, the Danes were. In any case, it looks like the CHF’s momentum has been broken and it’s at least a two-way bet nowadays. Personally I think the currency is so vastly overvalued that eventually something has to give. EUR/CHF and USD/CHF should move higher, in my view. But the trade surplus remains near a record high so it’s clearly not going to be quick. The CHF has been overvalued on a purchasing-power parity basis for decades now (since 1987, according to the OECD’s methodology) with apparently no ill effects, so don’t expect mean reversion any time soon. However with Swiss interest rates now negative out to 10 years, perhaps we will see more capital outflows from Swiss investors that will weaken the currency.
Japan’s output accelerates but inflation slows further The usual end-of-month data dump from Japan Friday showed that inflation continued to decelerate and household spending dropped even as the employment picture improved and industrial production finally picked up. The national CPI was unchanged in December at 2.4% yoy, but the core (excluding fresh foods) measure slowed to 2.5% from 2.7%. The Tokyo core CPI (excluding fresh foods) for January similarly slowed to 2.2% from 2.3%. This despite a recovery in industrial production, which was up 1.0% mom in December contrast to the -0.5% decline in November. The jobless rate declined further and the job-offers-to-applicants ratio improved as well, but household spending continued to decline – it’s fallen yoy for the last nine months in a row, ever since the consumption tax was hiked in April. It looks to me like Japan is finally getting an export-led bounce, as exports were up a surprising 12.8% yoy in December. Certainly the domestic picture is not encouraging; people continue to cut back on their spending despite an improving employment picture. This makes me think that the authorities are likely to see the weaker yen as perhaps their most successful policy achievement to date. Certainly in the context of global loosening, when so many central banks around the world are moving to a looser policy, the Bank of Japan will not want to lose the advantage that it’s gained. I think we are likely to see a continued weak yen.
Two central banks remain on hold Not every central bank is on the easing bandwagon. The South African Reserve Bank (SARB) and Bank of Mexico kept their rates unchanged yesterday.
Today’s highlights: During the European day, the main event will be the first estimate of Eurozone CPI for January. The fall of German CPI into deflation increased the likelihood that the bloc dips further into deflationary territory. This may keep EUR under selling pressure. Eurozone’s unemployment rate for December is also due out.
German retail sales for December are forecast to decelerate a bit.
In Norway, we get the unemployment rate for January and retail sales for December. Since the unemployment rate remains at very low levels, the market is likely to watch more the retail sales. Any disappointment may act as a trigger and push USD/NOK above the 7.84 strong resistance line.
In the UK, we get the mortgage approvals for December.
In the US, the 1st estimate of GDP for Q4 is expected to show that the US economy expanded at a slower pace than in Q3 (3.0% qoq SAAR vs 5.0%) The 1st estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have eased from the Q3. The employment cost index, a closely followed gauge that reflects how much firms and government pay their employees in wages and benefits, is expected to decelerate a bit from Q3 but remain above both the inflation rate and the average earnings figure, reassuring the Fed that compensation is rising along with improving employment conditions. The Chicago Purchasing managers’ index and the final University of Michigan consumer sentiment for January are coming out. Investors are likely to pay particular attention to the U of M surveys of 1-year and 5-to-10 year inflation expectations after the FOMC said Wednesday that “survey-based measures of longer-term inflation expectations have remained stable.”
Currency Titles:
EUR/USD waits for Eurozone CPI data
Are EUR/JPY bears ready to shoot?
AUD/USD breaks below 0.7870
Gold falls near the 1255 support hurdle
WTI finds buyers near 43.50
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Currencies Text:
EUR/USD moved in a consolidative manner on Thursday, staying between the support of 1.1260 (S1) and the resistance barrier of 1.1460 (R1). Yesterday, data showed that Germany fell into deflation, and this increases the possibilities that today’s 1st estimate of Eurozone CPI for January will move deeper into deflationary territory. This could give a reason to sellers to pull the trigger and push the rate below 1.1260 (S1). Something like that could aim for another test near the support zone of 1.1100 (S2), determined by the low of Monday. On the daily chart, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages.
• Support: 1.1260 (S1), 1.1100 (S2), 1.1025 (S3)
• Resistance: 1.1460 (R1), 1.1540 (R2), 1.1650 (R3)
EUR/JPY rebounded somewhat to hit resistance again near the 134.15 (R1) barrier. Having in mind the likelihood for a lower Eurozone CPI rate, I would expect the forthcoming wave to be to the downside. A move below the 132.30 (S1) line could probably confirm that and set the stage for extensions towards the psychological number of 130.00 (S2). On the daily chart, we can see that the rate breached the 3rd price objective of the “head and shoulders” formation completed back on the 30th of December, while the price structure still suggests a medium-term downtrend. Some concerns I have, derive from the daily oscillators. I see positive divergence between the 14-day RSI and the price action, while the daily MACD is bottoming and could move above its trigger line in the near future.
• Support: 132.30 (S1), 130.00 (S2), 129.30 (S3)
• Resistance: 134.15 (R1), 135.75 (R2), 137.65 (R3)
AUD/USD plunged yesterday, violating the support (turned into resistance) of 0.7870 (R1). Nevertheless, the fall was stopped slightly above the 0.7700 (S1) support line, defined by the low of the 13th of July 2009. Taking into account that the RSI just exited its below-30 territory, I would stay careful that the minor bounce could continue for a while. But since the price structure prints a negative near-term picture, I wouldn’t bet on that. I would expect the bears to seize control at some point and drive the battle below the 0.7700 (S1) line. Such a break is likely to open the way for the psychological figure of 0.7500 (S2). As far as the bigger picture is concerned, the break below the 0.8000 (R2) psychological hurdle is the move that triggered the continuation of the longer-term downtrend in my view.
• Support: 0.7700 (S1), 0.7500 (S2), 0.7450 (S3)
• Resistance: 0.7870 (R1), 0.8000 (R2), 0.8035 (R3)
Gold continued its tumble of Thursday, falling below the support (turned into resistance) obstacle of 1275 (R1), which happens to be the 23.6% retracement level of the 2nd – 22nd January advance. The slide found a halt fractionally close to the 1255 (S1) bar, which coincides with the 38.2% retracement level of the aforementioned advance. A dip below that line is likely to signal the continuation of the downside correction, perhaps towards the 1238 zone, the 50% retracement level. Our daily momentum indicators corroborate my view. The 14-day RSI moved lower and now lies near its 50 level, while the MACD has topped and fell below its trigger line. As for the overall path, with no clear trend reversal signals, I see the recent fall of the metal as a corrective phase for now.
• Support: 1255 (S1), 1238 (S2), 122 (S3)
• Resistance: 1275 (R1), 1300 (R2), 1320 (R3)
WTI fell on Thursday, but triggered some buy orders marginally above 43.50 (S1) and recovered to cover most of its losses. The price paused below the 45.00 (R1) psychological resistance, but bearing in mind the aforementioned recovery and that our short-term oscillators lie near their equilibrium lines, I would adopt a neutral stance for now. I would like to see a move below 43.50 (S1) in order to get more confident about the downside. Such a move is likely to target the 42.50 (S2) zone. In the bigger picture, WTI is still printing lower lows and lower highs below both the 50- and the 200-day moving averages, and this keeps the overall downtrend intact. However, the positive divergence between the daily oscillators and the price action, give me another reason to remain neutral and to wait for the momentum indicators to confirm the overall down path.
• Support: 43.50 (S1), 42.50 (S2), 40.00 (S3)
• Resistance: 45.00 (R1) 46.40 (R2), 47.35 (R3)
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